‘Speculators are the Cause of High Oil Prices’ Debunked
Joseph P. Kennedy II, former Congressional Representative from Massachusetts, and founder, chairman, and president of Citizens Energy Corporation, has a proposal to make energy affordable for all. All we have to do, Kennedy claims, is “bar pure oil speculators entirely from commodity exchanges in the United States.”
Writing in the New York Times last week, Joseph Kennedy (D-MA) explained why he believes that speculators are responsible for the high price that we currently have to pay for oil:
Today, speculators dominate the trading of oil futures. According to Congressional testimony by the commodities specialist Michael W. Masters in 2009, the oil futures markets routinely trade more than one billion barrels of oil per day. Given that the entire world produces only around 85 million actual “wet” barrels a day, this means that more than 90 percent of trading involves speculators’ exchanging “paper” barrels with one another.
It’s true that most buyers of futures contracts don’t actually want to take physical delivery of oil. If I buy the contract at some date, I usually plan on selling the contract back to somebody else at a later date, so that I leave the market with a cash profit or loss but no physical oil. But remember that for every buyer of a futures contract, there is a seller. The person who sold the initial contract to me also likely wants to buy out of the contract at some later date. I buy and he sells at the initial contract date, he buys and I sell at a later date. One of us leaves the market with a cash profit, the other with a cash loss, and neither of us ever obtains any physical oil.
China Stocks Up On Oil as West Moves To Sell Reserves
The Wall Street Journal suggests today that part of the latest surge in China’s oil imports is attributable to a desire to boost the country’s oil stockpiles.
Is Replacing Iran’s Oil Production Wishful Thinking?
If an embargo is successful in preventing Iran from selling a significant amount of oil on the world market, what would replace it?
On Friday the White House released the following statement:
there currently appears to be sufficient supply of non-Iranian oil to permit foreign countries to significantly reduce their import of Iranian oil, taking into account current estimates of demand, increased production by some countries, private inventories of crude oil and petroleum products, and available strategic petroleum reserves and in fact, many purchasers of Iranian crude oil have already reduced their purchases or announced they are in productive discussions with alternative suppliers.
That the President or anybody else is counting on the world demand for petroleum curve to shift left in 2012 seems doubtful. And which are the countries from which increased production is anticipated? Libyan production averaged only 500,000 barrels/day in 2011, and if things go well could soon be producing a million barrels more than that daily. In the mean time, disruptions in Sudan, Syria, and Yemen have taken out a separate 640,000 barrels/day. The best hope is perhaps Saudi Arabia, which presumably has been making private statements to U.S. officials similar to this public statement from Saudi Oil Minister Ali Naimi last Wednesday:
Saudi Arabia’s current capacity is 12.5m barrels per day, way beyond current levels demanded, and a reliable buffer against any temporary loss of production. Saudi Arabia has invested a great deal to sustain its capacity, and it will use spare production capacity to supply the oil market with any additional required volumes.
There’s A Rational Reason for Why Oil Prices Are So High
“There is no rational reason for high oil prices,” writes Ali Naimi, Saudi Arabian Minister of Petroleum and Mineral Resources, in today’s Financial Times. Well, I can think of one– if oil prices were lower, the world would want to consume more than is currently being produced.
The graph below plots total world oil production over the last decade. After growing rapidly in earlier years, production hit a bumpy plateau. In November 2007, just before the U.S. recession began, the world was producing 84.9 million barrels each day, a little less than was produced in the spring of 2005. Although production stagnated, the demand curve continued to shift out, with world GDP growing 5.3% in 2006 and another 5.4% in 2007.
Why Do Gasoline Prices Differ Across U.S. States?
Gasoline prices differ substantially across different parts of the United States. For example, the average price in Illinois is currently 70 cents/gallon higher than that in Wyoming, and California motorists pay 86 cents/gallon more than the folks in Wyoming. Why is that? Source: GasBuddy.com. The biggest single factor is taxes. The tax on a gallon of gasoline in Illinois is 25 cents higher than in Wyoming, while the California tax is 35 cents higher. Source: American Petroleum Institute. But that still leaves 45 cents of the Illinois premium and 51 cents of the California premium unexplained. Political Calculations has created a map of average gasoline prices once you subtract out taxes. (His original map, like that from GasBuddy above, also… Continue»
Will Oil Release from Strategic Petroleum Reserve Lower Prices?
The United States and Britain have apparently been discussing a joint release of strategic petroleum stockpiles.
The U.S. Strategic Petroleum Reserve was intended to be used in the event of a “severe energy supply interruption” whose legal definition is as follows:
A severe energy supply interruption shall be deemed to exist if the President determines that–
- an emergency situation exists and there is a significant reduction in supply which is of significant scope and duration;
- a severe increase in the price of petroleum products has resulted from such emergency situation; and
- such price increase is likely to cause a major adverse impact on the national economy.
Historical experience has shown that seemingly temporary supply disruptions can have very long-lasting consequences. Libyan oil production in November was still only about a third of what the country had been producing in January 2011 prior to last year’s disruptions. Iraqi production still has not returned to the average value seen in 1989 prior to the First Persian Gulf War. Iranian production has never returned to the average values achieved in 1977 prior to its revolution.
Why Current High Oil Prices Won’t Derail the U.S. Economy
Here’s why I believe that the current high price of oil is not enough to derail the U.S. economic recovery.
Although the prices of oil and gasoline have risen significantly from their values in October, they are still not back to the levels we saw last spring or in the summer of 2008. There is a good deal of statistical evidence (for example, [1],[2]) that an oil price increase that does no more than reverse an earlier decline has a much more limited effect on the economy than if the price of oil surges to a new all-time high.
Keystone Pipeline Moving Forward
In a development that should not have come as a surprise to Econbrowser readers, TransCanada announced on Monday that it would proceed with the portion of the controversial Keystone pipeline expansion that would connect Cushing, Oklahoma to the Gulf of Mexico. Because this part of the project does not cross the U.S.-Canadian border, it does not require approval from the U.S. State Department.
Factors in the Recent Oil Price Increases
Crude oil prices surged last spring following disruptions in oil production from Libya, and had been drifting down during the summer and fall. But since the beginning of October, the price of West Texas Intermediate and Brent crude oil have both risen by over 30%, putting them back up near where they had been last spring. What’s changed in the world since the beginning of October?
Price of West Texas Intermediate, dollars per barrel, weekly Jan 7, 2011 to Feb 24, 2012. Data source: Webstract.
Crude Oil and Gasoline Prices: Betting on Iranian Tensions
Crude oil prices this week reached their highest level since last April. What will that mean for U.S. consumers at the gas pump?
The first question to be clear on is which crude oil price we’re talking about. Two of the popular benchmarks are West Texas Intermediate, traded in Oklahoma, and North Sea Brent. Historically these two prices were quite close, and it didn’t matter which one you referenced. But due to a lack of adequate transportation infrastructure in the United States, the two prices have diverged significantly over the last year.
My rule of thumb has been that for every $1 increase in the price of a barrel of crude oil, U.S. consumers are likely to pay 2-1/2 more cents for a gallon of gasoline. The yellow line in the graph below plots the average U.S. retail price of regular gasoline in the U.S. over the last 4 years. The blue line is the gasoline price you’d predict if you applied my rule of thumb to the WTI price (assuming 80 cents/gallon for average tax and mark-up), while the fucshia line gives the prediction if you assume that the U.S. retail price is based on Brent. The three lines were quite close until Brent began to diverge from WTI at the beginning of last year. Since then, the U.S. retail price has tracked the world Brent price much more closely than it has WTI.
James Hamilton is a professor in the Economics Department at the University of California, San Diego. He has been a visiting scholar at the Federal Reserve Board in Washington, DC as well as many of the Federal Reserve Banks; and has also been a consultant for the National Academy of Sciences, Commodity Futures Trading Commission and the European Central Bank and has testified before the United States Congress.
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